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Canada regulation-free for VoIP startups

New regulations clamp down on incumbents, leaving room for others to compete.

Canadian utility officials unveiled new rules about Internet telephony Thursday that favor upstart service providers such as Vonage over the country's incumbent phone operators.

"This decision will further the goal of building sustainable competition in local telephone markets," the Canadian Radio-television and Telecommunications Commission wrote. The ruling came as no surprise to the phone companies and their competitors.

In effect, the CRTC decided that voice over Internet Protocol (VoIP) calls by customers of Canada's incumbent phone operators, Telus and Bell Canada, will be regulated in the same way as other calls the operators offer. Remaining all but unregulated is every other VoIP provider, from start-ups such as Vonage to well-heeled cable operators using VoIP to enter the phone business.

Canadian telco analyst Jon Arnold said he believes the ruling "ultimately makes it impossible for Telus and Bell Canada to be competitive in offering VoIP to consumers."

Telus executives have said that such a ruling would keep it from selling VoIP, which is software for turning broadband connections into phone lines. VoIP calls are much less expensive than those made over a traditional phone line. Representatives for Telus and for BellCanada could not immediately be reached Thursday to comment on the ruling.

The near-monopoly grip that Canada's incumbent phone operators have helps explain the regulators' tough line: Giving VoIP operators an advantage by leaving their calls unregulated helps level the playing field and creates new competition.

Without some kind of regulation on VoIP providers like Vonage and the cable companies, the phone companies, which control 97 percent of the market, could all but give away their VoIP offers in order to starve the competition. "You've got two phone companies that far and away have most of the customers, so if others benefit, so be it," said Bill Rainey, president of Vonage's Canadian operations.

The commission has been working on this issue since last April when, in a nonbinding decision, the agency opted to regulate most VoIP services. At the time, the CRTC wrote that it thought VoIP calls share enough "functional characteristics" to their circuit-switched competitors to merit regulating.

But the agency has since come under enormous pressure from Canadian cable operators, Vonage and other VoIP interests. Adhering to government regulations is an expensive proposition, VoIP upstarts argue, something that would quickly thin out the beehive of start-ups and force weaker providers to pare back their unlimited calling plans to just the United States, where VoIP remains unregulated.